Opinion

Felix Salmon

The Chrysler bondholders’ enviable deal

Felix Salmon
May 19, 2009 19:03 UTC

Scott Sperling has some home truths for Chrysler bondholders whining about how they’re being treated unfairly:

The plan demands that Chrysler’s current and future retirees take equity in lieu of guaranteed benefits. Fiat must agree to take only stock in payment for billions of dollars worth of needed technology. And the unions must accept lower wages alongside significant plant closures and job losses. These policies inflict pain across the board. Unfortunately, this situation requires it.

Interestingly, only the debtholders are being given the opportunity to take significant cash out of Chrysler. For all the other stakeholders, any return depends upon the difficult work and investment necessary for long-term success. This is hard, but this is capitalism.

I like this way of looking at things: if the bondholders would really rather have equity than cash, I’m sure they can come to some deal with the UAW, or even with the US government, to do a swap — basically buying a stake in the post-bankruptcy carmaker. But they won’t, because they don’t really want equity at all — they just want more cash, despite the fact that nobody else is getting any cash at all.

COMMENT

The issue for the bondholders is a far less than ‘enviable’ deal. They were forced by the US Commander-in-Thief to take a 10% stake in a company where they held 40% of the debt in secured instruments and a union that held far less UNsecured debt received nearly a 50% stake. Gee, I don’t think thats an ‘enviable’ position. It seems like another group being victimized by that “Change” virus thats going around. It makes you sick of your president, takes most of your money, and only leaves some change.

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Does “shareholder value” make any sense?

Felix Salmon
May 19, 2009 18:19 UTC

Justin Fox, in an excerpt from his new book, explains that “shareholder value” didn’t always mean “share price”:

The goal was to get corporate executives to pay less attention to accounting earnings and focus instead on economic earnings – which Alfred Rappaport, who taught at Northwestern University’s Kellogg School of Management, defined as anticipated cash flow discounted by the cost of capital. It was an argument for paying attention to what created value over time instead of stressing out about quarterly earnings. Which doesn’t sound dumb.

“I don’t know how many times I kept saying long term, long term, long term,” explains Rappaport, who is now 77 and living in semiretirement in Southern California, but still pens the occasional Harvard Business Review article and has a new book in the works. “To me, shareholder value was not about an immediate boost to stock price.”

This kinda assumes, however, that shareholders are in it for the long, long term too. If management’s incentives are aligned with the long-term interests of shareholders, and neither cares too much about short-term share-price fluctuations, that’s great.

But we live in a world where the overwhelming majority of stock-market investors mark their holdings to market daily, even if their time horizon is measured in years. In that world, shareholder value is the stock price, whether markets are efficient or not.

Justin says that the concept of shareholder value is not a dumb idea, as Jack Welch would have it. But in order to believe that shareholder value makes sense, you also have to believe that if you buy a stock at $100 and it drops to $50, then you haven’t lost any money so long as you haven’t actually sold the stock. And there aren’t many people who really believe that.

COMMENT

“But in order to believe that shareholder value makes sense, you also have to believe that if you buy a stock at $100 and it drops to $50, then you haven’t lost any money so long as you haven’t actually sold the stock. And there aren’t many people who really believe that.”

NO. I have to believe that the original Value Proposition is still intact (at which point I double- or treble-down, liquidity permitting.

Example 1: A judge declares a software company a monopoly and told to break up. I see this as a Value Proposition for the otherwise-bloated company. I buy the stock.

A year or so later, another, higher judge says, “eh, forget that. Keep making larger, more bloated, memory-hogging O/Ses as a long-term strategy.”

I sell the stock. (Whether I make or lose money is an accounting matter.)

Example 2: A small fast-food franchise specialising in rotisserie chicken and interesting side salads at a time when its main, Well-Established Competitor is fried-chicken-and-potato-product-specifi c gains some market share and launches an IPO.

The purpose of the IPO is to expand the franchise, placing it in direct competition with the Well-Established Competitor.

The WEC–knowing full well that a rotisserie chicken recipe is a non-rival good–expands its menu and adds a few sides. Whether it is as good may motivate some buyers, but most will stay with the Brand Name, and the small franchise with a relative monopoly is now competing with a Deep-Pocketed Near-Equivalent Rival, and taking on debt.

If you bought the IPO, you certainly sell it. In fact, if you’re looking for Value Proposition and reading the Prospectus, you probably don’t buy it in the first place–unless you’re buying to flip. And, again, profit or loss is an accounting consideration, not a Value Proposition.

Any similarity to real corporations above is entirely a matter for Google.

Mark Patterson’s publicity troubles

Felix Salmon
May 19, 2009 17:58 UTC

Mark Patterson, of MatlinPatterson, is having his lawyers run around all manner of blogs trying to get them to remove a story originally printed — and possibly to be printed again — in the Daily Telegraph. At this point, all the unhelpful publicity that’s resulting is making it seem as though he would have been better off just ignoring the original article. But while he’s in the news, let’s not forget that he’s not only being accused of calling the TARP a “sham” and a gift to speculators. He’s also the chap who seems to be doing end-runs around bank-ownership rules which seem to be designed to violate the spirit if not the letter of regulations barring private-equity shops from owning banks. Since he’s in the public eye, perhaps now is a good time to start investigating that side of things more closely?

COMMENT

You are right that now is a good time to investigate not only end runs around bank ownership rules, but MatlinPatterson, itself. In my blog I cover one of MatlinPatterson’s directors, Lap Wai Chan who is a fugitive from Brazil. Lap Wai Chan had attempted to siphon off some Variglog funds into MatlinPatterson’s Swiss bank account. MatlinPatterson had purchased Variglog, Brazil’s airline. Brazil attempted to confiscate Lap Wai Chan’s passport. Seems he is Brazilian, Chinese and American – indeed a worthy recipient of TARP funds.

Why didn’t the WSJ stress-test the big banks?

Felix Salmon
May 19, 2009 16:48 UTC

The WSJ has a very pretty interactive graphic, showing what’s likely to happen to the capital of 940 small and medium-sized banks if the “adverse” scenario in the government’s stress test comes to pass. Essentially, using public information, the Journal tried to replicate the stress tests across the industry as a whole.

I’m disappointed by this, however:

The 19 big banks that underwent a Fed stress test weren’t included in the Journal’s calculations….

The calculations don’t reflect any efforts made by individual banks since the start of this year to shore up their capital, such as shedding assets or cutting costs.

Obviously an exercise in crunching the numbers of 940 banks using public information is never going to be as detailed or granular as the stress tests were. But the stress tests put great store in efforts to shore up capital, and it’s entirely possible that those efforts might have made a significant difference. On the other hand, it’s possible they wouldn’t.

So I would really have liked it had the WSJ decided to increase the number of banks they did this exercise on from 940 to 959. It wouldn’t have been all that much in the way of extra work, and then we could see very clearly how the WSJ’s approximation of the stress tests compares to the real thing. Does the WSJ methodology produce similar numbers to the actual stress tests or not? If they printed the results from the 19 big banks, we could see for ourselves. Instead, they made a conscious decision not to run the numbers on the 19 big banks, thereby making it much harder to tell how reliable the numbers are. Weird.

Update: DollarEd puts it more sharply:

Obviously, the WSJ had sufficient data and a sound enough methodology that they were confident enough to apply it against 940 banks and publish the results. So, it would be very valuable, both to validate the WSJ’s work and to learn more about the Big Banks, to apply it to those 19 Big Banks. After all, they comprise 58% or something like that of the banking sector, so to not extend the coverage of the article really shifts the article from National News to some sort of stock picking (or dumping) exercise.

DollarEd reckons this is a function of the WSJ being essentially captured by the big banks. Is there another explanation?

COMMENT

Felix:

Regulators had 157 full time examiners going over the 19 largest banks for weeks. The WSJ probably had two guys with an excel spreadsheet try to put together their methodology in about 2 days.

Maybe there is a better reason than the grassy knoll for the wsj to punt on the largest 19. Cost vs benefit for a story.

Regards

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No consumers need worry about the credit card rules

Felix Salmon
May 19, 2009 16:28 UTC

Francis Cianfrocca is scaremongering: the new credit card regulations, he says, will end up hurting people who pay off their balance in full every month.

The credit card industry will have no choice but to start raising fees on the people who do what your mother always told you to do: pay off your debts on time and avoid high-rate balances. Stories are circulating that typical credit cards will start carrying mandatory fees, higher interest rates, and reduced or eliminated grace periods. As long as you’re going to spend money with plastic, your bank is going to insist on taking a cut, and they’ll find a way to do so.

What’s scary about this, is that this will be officially government-sanctioned behavior…

I hate being in debt so much that I don’t even have a mortgage. I’ll definitely be carrying less plastic from now on.

A few points are worth making here.

First, the cost to society of having millions of individuals carrying large credit-card balances with very high interest rates is vastly greater than the benefit to people like Cianfrocca of having a reasonably convenient way of paying for goods in shops.

Second, people like Cianfrocca are profitable for the card companies, thanks to those ever-rising interchange fees, not to mention the foreign-transaction fees etc etc. They might not be as profitable as the people who run balances, but banks are not going to be in any hurry to drive them away.

Third, if people like Cianfrocca start “carrying less plastic”, the harm to them (and us) is basically zero, until they get down to just one card. There’s no real need to have more than one credit card, especially if you’re paying off your balance every month.

Having a wallet full of credit cards, all of which you have to remember to pay off in full every month, and most of which won’t let you do so automatically, is actually not a particularly easy or efficient way of organizing your spending. If the new credit card rules move people away from that base case, and encourage them to simply spend money instead (using a debit card, or cash), then so much the better.

COMMENT

Except that if those of us who are actually responsible cut down on the cards we use and carry or have to pay hefty fees just to have but not use them, our FICO score goes down – impacting our ability to get a mortgage, job, even our insurance rates.

I got through college without debt or credit cards. As a reward for my financial responsibility, after graduating, six months into a steady job paying $65k/year, getting a car loan for $6k required a co-signer and a 21% interest rate. (in 1999)

I’m kind of enraged at the idea of soon having to pay yearly fees to the credit card companies just so I’ll be able to get a good mortgage rate eventually.

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The book of the year

Felix Salmon
May 19, 2009 16:06 UTC

It’s one of the most eagerly-awaited books of 2009, and it features “a bizarre tangle of motives and passions whose cast of characters includes surfers, hustlers, dopers and rockers, a murderous loan shark, a tenor sax player working undercover, an ex-con with a swastika tattoo and a fondness for Ethel Merman, and a mysterious entity known as the Golden Fang”. More generally, there’s a “splendid cast of characters [which] includes villains, a few heroes, and a lot of people who look very, very foolish”, including “the goats and the few who saw what the emperor was wearing”.

Oh, wait, I’m conflating two different books. But really, wouldn’t “Inherent Vice” be a much better title for Michael Lewis’s crisis book than “The Big Short”? And when is Pynchon going to start writing about finance?

COMMENT

Or Umberto Eco?

Though I think the only person who could really do the last 20 years justice would be the late James Whale. With Peter Cushing as Robert Merton:

“They said I was MAD at the university! MAD!! But I’ll SHOW THEM!”

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Barry Ritholtz’s book: Where are the bloggers?

Felix Salmon
May 19, 2009 14:54 UTC

Barry Ritholtz’s book just landed on my desk, and I’m looking forward to reading it, since I think that bloggers in general, and Barry in particular, have been very much ahead of the curve in terms of identifying and comprehending the contours of this crisis.

As befits a book from such an assiduous source-citer as Ritholtz, Bailout Nation comes with 17 pages of endnotes, most of them with URLs. But here’s the funny thing: the number of blogs cited is tiny. Paging through the notes, I see Barry citing himself a couple of times, there’s one reference to TPM Muckraker, and that’s about it. A blog entry by John Carney does make it into the book, but is cited at its Yahoo Finance address, complete with annoyingly auto-playing video. Occasionally bloggers appear — me, Arianna Huffington, Paul Krugman — but never for our blog entries, only for more formal things we’ve written (in my case, my NYT op-ed). And we’re all more or less part of the mainstream media anyway. “Pure” bloggers are I think entirely absent from the book. Meanwhile, columnists in more mainstream outlets get cited quite frequently.

I suspect that what’s going on here is akin to the “cultural cringe” that was first diagnosed in Australia in the 1950s: an internalized inferiority complex whereby bloggers tend to consider blogs to be lesser than newspaper and magazine articles and columns. And if A-list econobloggers like Barry think that way, just imagine what the rest of the financial world thinks.

Update: Barry responds.

COMMENT

Good blog, do you always post new blog here?

Cheers.

TED datapoint of the day: 48bp

Felix Salmon
May 19, 2009 14:04 UTC

Remember the TED spread? It closed at 139bp on March 17, which was a decided improvement over the levels over 400bp we saw last fall, but was still pretty wide.

Yesterday, however, it closed at 58bp, and today it’s finally broken the 50bp barrier, last at 48bp. Back when the likes of Paul Krugman started blogging the TED spread, in March 2008, it was oscillating wildly between about 100bp and 200bp. Now it’s back to much more normal levels — and I wonder whether that means the interbank market is beginning to pick up again. Any volume figures on that?

COMMENT

That’s funny. I’ve been watching the TED spread now and again and noting its progress, and was just looking it up as evidence against the henny penny the sky is falling crowd howling about the dangers of the declining VIX.

A falling TED spread seems good by me.

Financial branding datapoint of the day

Felix Salmon
May 19, 2009 02:58 UTC

As Lance Knobel notes, the methodology behind the annual BrandZ league tables is full of mumbo-jumbo — but that doesn’t mean you can’t make like-for-like comparisons. So here’s last year’s league table for financial institutions, on the left, and this year’s, on the right.

brandz.jpg

The changes are staggering. Last year, the two most valuable financial brands in the world were Bank of America and Citi; this year, BofA is in 8th place, while Citi’s not even in the top ten any more. Both have lost more than half their brand value in the space of one year. Last year, four of the top five banks were US-based; this year, the top four comprise three Chinese banks and a fourth with the China-centric name of Hongkong and Shanghai Banking Corporation. Last year’s top 20 is this year’s top 15, despite the arrival of Visa (with a valuation which is now good for 5th place, but which would have got it only 10th place last year).

In general, the US franchises all took a huge tumble, with Goldman Sachs, Morgan Stanley, Merrill Lynch, and JP Morgan all falling off the league table entirely. The Chinese and Spanish banks did well, the Canadians were mixed, and Standard Chartered (can we call them African? Or at least emerging-market?) entered the league table at 15.

It’ll be very interesting to see how lasting these changes are. I doubt that the three most valuable financial brands in the world are all Chinese, and I do think that the likes of Goldman and JP Morgan are going to reappear, along with UBS and Deutsche. But I also think that Santander is now pretty safely ensconced in the top ten, and I don’t think that Merrill Lynch and Wachovia are going to join BofA and Wells Fargo in the same way that both Chase and JP Morgan appeared on the last last year. Some of the effects of this crisis will turn out to be temporary, but others are most decidedly permanent.

Update: Jake charts the changes.

COMMENT

The other thought here is how much of the almost 50% devaluation of some financial brands, large or small, is connected to loss of stakeholder trust. A hard to measure attribute that in this next economy should be a comparative index along side the dollar value. Raising capital is one thing, renewing trust is another.

The brands that recognize this is the gap that needs to be addressed though internal culture and external candor will be the ones that move up in next year’s table.

Going from a Bail out to a Stand out
http://www.sequelstudio.com/insights/art icle/going_from_a_bail_out_to_a_stand_ou t/

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